It is fair to say that 2022 has been challenging. Growth shares have fallen to reduce their sky-high valuations. Value has continued to be neglected, falling less than growth but still underperforming. It is only the dividend investing sector showing signs of promise. Yields have been rising over the year, and this can be a way to protect a portfolio against negative performance.
Importance of dividends
To illustrate this further, the FTSE 100 is down over 4% year to date, resulting in a seemingly wasted year. All attempts at share price gains are likely to have been eroded over the year. However, the average yield is 4%, meaning that a dividend-focused portfolio would have maintained its value in the last 12 months.
For this reason, I have looked for one company within the FTSE that pays significant dividends and has high-quality fundamentals. This approach can act as a valuable form of diversification within a portfolio. It is also an excellent way of generating passive income from my investments.
To make the share selection process more efficient, I have used an index filter. This screener looks for companies paying a fair dividend while also having a range of strong underlying fundamentals. As a result, I identified Britvic (LSE: BVIC), the manufacturer of soft drinks within the UK and Europe. The shares struggled with consistent growth over the last few years, rising in 2021 before falling almost 20% in 2022.
However, the yield drew my attention, as it is currently paying a dividend of 3.3%. This is forecast to reach 3.8% next year. Furthermore, the company has produced this dividend consistently for 16 years and has reinstated its dividend growth over the previous year. It also has a dividend coverage ratio of 1.8, indicating that the current level can be comfortably paid using earnings per share (EPS).
The underlying fundamentals are also attractive, with sensible profit margins and a reasonable level of earnings generation on invested capital. this is a core indicator of a share’s quality. The forecast growth for the company is also encouraging, with turnover expected to grow 13% and EPS to rise over 25%. These growing fundamentals further strengthen my confidence in the dividend, as earnings need to continue rising to ensure yields grow over the years.
However, it is essential to note that there are a few negatives to take into consideration. The current price-to-earnings (P/E) ratio is almost 17. This is reasonably high despite the share price fall over the last year. Additionally, debt as a proportion of market capitalisation is somewhat elevated. In fact, it has increased over its three-year average, which could put additional pressure on dividend payments in the future.
Nonetheless, when combined with strong underlying fundamentals, this current yield presents a good opportunity in the current market. I want to add this dividend share to my portfolio at the beginning of 2023.
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Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has recommended Britvic. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.